Merger and Acquisition in India
Content
Merger and Acquisition in India Mergers and acquisitions (M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. An acquisition, also known as a takeover or a buyout, is the buying of one company (the ‘target’) by another. The acquisition process is very complex and various studies shows that only 50% acquisitions are successful. An acquisition may be friendly or hostile. In a friendly takeover a companies cooperate in negotiations. In the hostile takeover, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover. Although merger and amalgamation mean the same, there is a small difference between the two. In a merger one company acquires the other company and the other company ceases to exist. In an amalgamation, two or more companies come together and form a new business entity. Governing Law: The Companies Act, 1956 does not define the term 'Merger' or 'Amalgamation'. It deals with schemes of merger/ acquisition which are given in s.390-394 'A', 395,396 and 396 'A'. Classifications of mergers Horizontal merger – is the merger of two companies which are in produce of same products. This can be again classified into Large Horizontal merger and small horizontal merger.
Horizontal merger helps to come over from the competition between two companies merging together strengthens the company to compete with other companies. Horizontal merger between the small companies would not effect the industry in large. But between the larger companies will make an impact on the economy and gives them the monopoly over the market. Horizontal mergers between the two small companies are common in India. When large companies merging together we need to look into legislations which prohibit the monopoly. Vertical merger – is a merger between two companies producing different goods or services for one specific finished product. Vertical merger takes between the customer and company or a company and a supplier. IN this a manufacture may merge with the distributor or supplier of its products. This makes other competitors difficult to access to an important componet of product or to an important channel of distribution which are called as "vertical foreclosure" or "bottleneck" problem.Vertical merger helps to avoid sales taxes and other marketing expenditures. Market-extension merger - is a merger of two companies that deal in same products in different markets. Market extension merger helps the companies to have access to the bigger market and bigger client base. Product-extension merger – takes place between the two or more companies which sells different products but related to the same category. This type of merger enables the new company to go in for a pooling in of their products so as to serve a common market, which was earlier fragmented among them. This merger is between two companies that sell different, but somewhat related products, in a common market. This allows the new, larger company to pool their products and sell them with greater success to the already common market that the two separate companies shared. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.
Conglomeration - Two companies that have no common business areas. A conglomeration is the merger of two companies that have no related products or markets. In short, they have no common business ties. Conglomerate channels. Congeneric merger: Merger between firms in the same general industry but having no mutual buyer-seller relationship, such as a merger between a bank and a leasing company. A me r ge r i n w h i c h o n e f i r m a c q u i re s a n o t h e r f i r m t h a t i s i n t h e s a me ge n e r a l i n d u s t r y b u t n e i t h e r i n t h e s a me l i n e o f b u s i n e s s n o r a s u p p l i e r o r c u s t o me r . Purchase mergers - this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. Consolidation mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger. A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO. Accretive mergers are those in which an acquiring company's earnings per share (EPS) increase. An alternative way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E. merger in which merging firms are not competitors, but
use common or related productionprocesses and/or marketing and distribution
Dilutive
mergers are
the
opposite
of
above,
whereby
a
company's EPS decreases. The company will be one with a low P/E acquiring one with a high P/E.
Merger and Acquisition Procedures: 1. Memorandum Of Association (M/A):-The Memorandum of Association must provide the power to amalgamate in its objects clause. It M/A is silent, amendment in M/A must take place.
2. Board Meeting:-A Board Meeting shall be convened to consider and pass the following requisite resolutions: - approve the draft scheme of amalgamation; - to authorize filing of application to the court for directions to convene a general meeting; - to file a petition for confirmation of scheme by the High Court.
Through an application under s.391/ 394 of Companies Act, 1956 can be made by the member or creditor of a company, the court may not be able to sanction the scheme which is not approved by the company by a Board or members resolution. Directors who are given the necessary powers by the AoA may present a petition on behalf of the company without first obtaining the approval of the company in general meeting. 3. Application to the Court:- An application shall be made to the court for directions to convene a general meeting by way of Judge's summons(Form No. 33) supported by an affidavit(Form No. 34). The proposed scheme of amalgamation must be attached to such affidavit.. The summons should be accompanied by: -A certified copy of the M&A of both companies
-A certified true copy of the latest audited B/S and P&L A/c of transferee company The application to convene meeting under s.391(1) is required to be made to the respective jurisdictional HC by the company concerned depending on the location of its registered office. Similarly an application for the scheme of arrangement will have to be made to the concerned HC where the company’s registered office is situated. Person entitled to apply:(i) U/s.391 & 394, members of the company have right to apply to court (ii) A successor to a share of a deceased member has in the normal course, locus standi to maintain an application u/s.391, 395. (iii) An application can also be made by the transferee of shares. (iv)The creditor also have right to apply to court. (v) The liquidator is also empowered to make an application to the court. 4. Copy to Regional Director:-A copy of application made to concerned H.C. shall also be sent to the R.D. of the region. Although, such notice is supposed to be sent by the H.C., usually the company sends it without waiting for the H.C. to send it. 5. Order Of High Court(Orders in - Form No. 35):-On hearing of the summons, the H.C. shall pass the necessary orders which shall include: (a) Time and place of the meeting, (b) Chairman of the meeting, (c) Fixing the quorum, (d) Procedure to be followed in the meeting for voting by the proxy,
(e) Advertisement of notice of the meeting, (f) Time limit for the chairman to submit the report to the court regarding the result of the meeting. Where the court observes that any of the following circumstances exist in the case of the merger it may not order a meeting when shareholders are few in number; or where the membership is restricted to a single family, HUF or close relatives; or where shareholding pattern of transferor and transferee companies is identical.
6. Notice Of The Meeting(Notice in - Form No. 36):-The notice of the meeting shall be sent to the creditors and/or all the shareholders individually (including preference shareholders) by the chairman so appointed by registered post enclosing: (a) A statement setting forth the following: - Terms of amalgamation and its effects - Any material interests of the director, MDs or Manager, in any capacity - Effect of the arrangement on those interests. (b) A copy of the proposed scheme of amalgamation (c) A form of proxy,( Proxy in - Form No. 37) (d) Attendance slip, (e) Notice of the resolution for authorizing issue of shares to persons other than existing shareholders Computation: The notice that is required to be given u/s.393 of the Act for the meeting of the members/creditors shall be by 21 clear days notice. 7. Advertisement of Notice Of Meeting(Advertisement in - Form No. 38):-The notice of the meeting shall be advertised in an English and Hindi Newspapers
as the court may direct by giving not less than 21 clear days notice before the date fixed for the meeting. However in some instances, the 21 days period can be condoned if reasons are found jusiticiable. 8. Notice To Stock Exchange:- In case of the listed company, 3 copies of the notice of the general meeting along with enclosures shall be sent to the Stock Exchange where the company is listed. 9. Filing Of Affidavit For The Compliance:- An affidavit not les than 7 days before the meeting shall be filed by the Chairman of the meeting with the Court showing that the directions regarding the issue of notices and advertisement have been duly complied with. 10. General Meeting:-The General Meeting shall be held to pass the following resolutions: (a) Approving the scheme of amalgamation by ¾th majority e.g. if a meeting is attended by say 100 members holding 100 shares, the scheme shall be deemed to have been approved only when it is supported by atleast 51 members holding together 750 shares amounts themselves; (b) Special Resolution authorizing allotment of shares to persons other than existing shareholders or an ordinary resolution be passed subject to getting Central Government's approval for the allotment as per the provisions of Section 81(1A) of the Companies Act, 1956, (c) The resolution to empower directors to dispose of the shares not taken up by the dissenting shareholders at their discretion., (d) An ordinary/special resolution shall be passed to increase the Authorized share capital, if the proposed issue of shares exceeds the present authorized capital. The decision of the meeting shall be ascertained only by taking a poll on resolutions.
In case of Transfer company need not to pass a special resolution for offering shares to the persons other than the existing shareholders. 11. Reporting of Result of the Meeting(Report in - Form No. 39):-The Chairman of the meeting shall report the result of the meeting to the court within the time fixed by the judge or within 7 days, as the case may be. A copy of proceedings of the meeting shall also be sent to the concerned Stock Exchange. 12. Formalities With ROC:- The following documents shall be filed with ROC along-with the requisite filing fees: (i)Form No. 23 of Companies General Rules & Forms + copy of Special Resolution, (there is no need for the transferor company to file Form No. 23 of the Companies General Rules and Forms with the Registrar of Companies.) (ii)Resolution approving the scheme of amalgamation, (iii) Special resolution passed for the issue of shares to persons other than existing shareholders. 13. Petition (Petition in - Form No. 40):-For approval of the scheme of amalgamation, a petition shall be made to the H.C. within 7 days of the filing of report by the chairman. If the Regd. Offices of the companies are in same state - then both the companies may move jointly to the High Court. If the Regd. Offices of the companies are in different states - then each company shall move the petition in respective High Court for directions. However in a recent judgment of Jaipur Polypin Ltd. v. Rajasthan Spinning & Weaving Mills, it was held that when the two companies are at different places, then no need to file an application at two different places.
14. Sanction of The Scheme:- The Court shall sanction the scheme on being satisfied that: (i) The whole scheme is annexed to the notice for convening meeting. (This provision is mandatory in nature) (ii) The scheme should have been approved by the company by means of ¾th majority of the members present. (iii)The scheme should be genuine and bona fide and should not be against the interests of the creditors, the company and the public interest. After satisfying itself, the court shall pass orders in the requisite form(Orders in - Form No. 41). The requirement of law is permission or approval of court to the scheme. The application made by the company is to seek court’s approval to the company scheme of amalgamation and not merely ordering a meeting. The court may order a meeting of members too. The court must consider all aspects of the matter so as to arrive at a finding that the scheme is fair, just and reasonable and does not contravene public policy or any statutory provision. While interpreting s.394 r/w s.391, we find that the Tribunal’s power of ordering amalgamation/reconstruction is limited by two provisos of s.394: Firstly, Tribunal has to await the receipt of report from the Registrar of Companies about the manner in which affairs of the Company are conducted. Secondly, when the transferor company is proposed to be dissolved without winding up, the Tribunal shall await. 15. Stamp Duty :A scheme sanctioned by the court is an instrument liable to stamp duty. 16. Filing with ROC: The following documents shall be filed with ROC within 30 days of order: -A certified true copy of Court's Order
-Form No. 21 of Companies General Rules & Forms 17. Copy of Order to be annexed: A copy of court's order shall be annexed to every copy of the Memorandum of Association issued after the certified copy of the order has been filed with as aforesaid. 18. Allotment of shares: A Board Resolution shall be passed for the allotment of shares to the shareholders in exchange of shares held in the transferorcompany and to fix the record date for this purpose.
Horizontal merger helps to come over from the competition between two companies merging together strengthens the company to compete with other companies. Horizontal merger between the small companies would not effect the industry in large. But between the larger companies will make an impact on the economy and gives them the monopoly over the market. Horizontal mergers between the two small companies are common in India. When large companies merging together we need to look into legislations which prohibit the monopoly. Vertical merger – is a merger between two companies producing different goods or services for one specific finished product. Vertical merger takes between the customer and company or a company and a supplier. IN this a manufacture may merge with the distributor or supplier of its products. This makes other competitors difficult to access to an important componet of product or to an important channel of distribution which are called as "vertical foreclosure" or "bottleneck" problem.Vertical merger helps to avoid sales taxes and other marketing expenditures. Market-extension merger - is a merger of two companies that deal in same products in different markets. Market extension merger helps the companies to have access to the bigger market and bigger client base. Product-extension merger – takes place between the two or more companies which sells different products but related to the same category. This type of merger enables the new company to go in for a pooling in of their products so as to serve a common market, which was earlier fragmented among them. This merger is between two companies that sell different, but somewhat related products, in a common market. This allows the new, larger company to pool their products and sell them with greater success to the already common market that the two separate companies shared. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.
Conglomeration - Two companies that have no common business areas. A conglomeration is the merger of two companies that have no related products or markets. In short, they have no common business ties. Conglomerate channels. Congeneric merger: Merger between firms in the same general industry but having no mutual buyer-seller relationship, such as a merger between a bank and a leasing company. A me r ge r i n w h i c h o n e f i r m a c q u i re s a n o t h e r f i r m t h a t i s i n t h e s a me ge n e r a l i n d u s t r y b u t n e i t h e r i n t h e s a me l i n e o f b u s i n e s s n o r a s u p p l i e r o r c u s t o me r . Purchase mergers - this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. Consolidation mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger. A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO. Accretive mergers are those in which an acquiring company's earnings per share (EPS) increase. An alternative way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E. merger in which merging firms are not competitors, but
use common or related productionprocesses and/or marketing and distribution
Dilutive
mergers are
the
opposite
of
above,
whereby
a
company's EPS decreases. The company will be one with a low P/E acquiring one with a high P/E.
Merger and Acquisition Procedures: 1. Memorandum Of Association (M/A):-The Memorandum of Association must provide the power to amalgamate in its objects clause. It M/A is silent, amendment in M/A must take place.
2. Board Meeting:-A Board Meeting shall be convened to consider and pass the following requisite resolutions: - approve the draft scheme of amalgamation; - to authorize filing of application to the court for directions to convene a general meeting; - to file a petition for confirmation of scheme by the High Court.
Through an application under s.391/ 394 of Companies Act, 1956 can be made by the member or creditor of a company, the court may not be able to sanction the scheme which is not approved by the company by a Board or members resolution. Directors who are given the necessary powers by the AoA may present a petition on behalf of the company without first obtaining the approval of the company in general meeting. 3. Application to the Court:- An application shall be made to the court for directions to convene a general meeting by way of Judge's summons(Form No. 33) supported by an affidavit(Form No. 34). The proposed scheme of amalgamation must be attached to such affidavit.. The summons should be accompanied by: -A certified copy of the M&A of both companies
-A certified true copy of the latest audited B/S and P&L A/c of transferee company The application to convene meeting under s.391(1) is required to be made to the respective jurisdictional HC by the company concerned depending on the location of its registered office. Similarly an application for the scheme of arrangement will have to be made to the concerned HC where the company’s registered office is situated. Person entitled to apply:(i) U/s.391 & 394, members of the company have right to apply to court (ii) A successor to a share of a deceased member has in the normal course, locus standi to maintain an application u/s.391, 395. (iii) An application can also be made by the transferee of shares. (iv)The creditor also have right to apply to court. (v) The liquidator is also empowered to make an application to the court. 4. Copy to Regional Director:-A copy of application made to concerned H.C. shall also be sent to the R.D. of the region. Although, such notice is supposed to be sent by the H.C., usually the company sends it without waiting for the H.C. to send it. 5. Order Of High Court(Orders in - Form No. 35):-On hearing of the summons, the H.C. shall pass the necessary orders which shall include: (a) Time and place of the meeting, (b) Chairman of the meeting, (c) Fixing the quorum, (d) Procedure to be followed in the meeting for voting by the proxy,
(e) Advertisement of notice of the meeting, (f) Time limit for the chairman to submit the report to the court regarding the result of the meeting. Where the court observes that any of the following circumstances exist in the case of the merger it may not order a meeting when shareholders are few in number; or where the membership is restricted to a single family, HUF or close relatives; or where shareholding pattern of transferor and transferee companies is identical.
6. Notice Of The Meeting(Notice in - Form No. 36):-The notice of the meeting shall be sent to the creditors and/or all the shareholders individually (including preference shareholders) by the chairman so appointed by registered post enclosing: (a) A statement setting forth the following: - Terms of amalgamation and its effects - Any material interests of the director, MDs or Manager, in any capacity - Effect of the arrangement on those interests. (b) A copy of the proposed scheme of amalgamation (c) A form of proxy,( Proxy in - Form No. 37) (d) Attendance slip, (e) Notice of the resolution for authorizing issue of shares to persons other than existing shareholders Computation: The notice that is required to be given u/s.393 of the Act for the meeting of the members/creditors shall be by 21 clear days notice. 7. Advertisement of Notice Of Meeting(Advertisement in - Form No. 38):-The notice of the meeting shall be advertised in an English and Hindi Newspapers
as the court may direct by giving not less than 21 clear days notice before the date fixed for the meeting. However in some instances, the 21 days period can be condoned if reasons are found jusiticiable. 8. Notice To Stock Exchange:- In case of the listed company, 3 copies of the notice of the general meeting along with enclosures shall be sent to the Stock Exchange where the company is listed. 9. Filing Of Affidavit For The Compliance:- An affidavit not les than 7 days before the meeting shall be filed by the Chairman of the meeting with the Court showing that the directions regarding the issue of notices and advertisement have been duly complied with. 10. General Meeting:-The General Meeting shall be held to pass the following resolutions: (a) Approving the scheme of amalgamation by ¾th majority e.g. if a meeting is attended by say 100 members holding 100 shares, the scheme shall be deemed to have been approved only when it is supported by atleast 51 members holding together 750 shares amounts themselves; (b) Special Resolution authorizing allotment of shares to persons other than existing shareholders or an ordinary resolution be passed subject to getting Central Government's approval for the allotment as per the provisions of Section 81(1A) of the Companies Act, 1956, (c) The resolution to empower directors to dispose of the shares not taken up by the dissenting shareholders at their discretion., (d) An ordinary/special resolution shall be passed to increase the Authorized share capital, if the proposed issue of shares exceeds the present authorized capital. The decision of the meeting shall be ascertained only by taking a poll on resolutions.
In case of Transfer company need not to pass a special resolution for offering shares to the persons other than the existing shareholders. 11. Reporting of Result of the Meeting(Report in - Form No. 39):-The Chairman of the meeting shall report the result of the meeting to the court within the time fixed by the judge or within 7 days, as the case may be. A copy of proceedings of the meeting shall also be sent to the concerned Stock Exchange. 12. Formalities With ROC:- The following documents shall be filed with ROC along-with the requisite filing fees: (i)Form No. 23 of Companies General Rules & Forms + copy of Special Resolution, (there is no need for the transferor company to file Form No. 23 of the Companies General Rules and Forms with the Registrar of Companies.) (ii)Resolution approving the scheme of amalgamation, (iii) Special resolution passed for the issue of shares to persons other than existing shareholders. 13. Petition (Petition in - Form No. 40):-For approval of the scheme of amalgamation, a petition shall be made to the H.C. within 7 days of the filing of report by the chairman. If the Regd. Offices of the companies are in same state - then both the companies may move jointly to the High Court. If the Regd. Offices of the companies are in different states - then each company shall move the petition in respective High Court for directions. However in a recent judgment of Jaipur Polypin Ltd. v. Rajasthan Spinning & Weaving Mills, it was held that when the two companies are at different places, then no need to file an application at two different places.
14. Sanction of The Scheme:- The Court shall sanction the scheme on being satisfied that: (i) The whole scheme is annexed to the notice for convening meeting. (This provision is mandatory in nature) (ii) The scheme should have been approved by the company by means of ¾th majority of the members present. (iii)The scheme should be genuine and bona fide and should not be against the interests of the creditors, the company and the public interest. After satisfying itself, the court shall pass orders in the requisite form(Orders in - Form No. 41). The requirement of law is permission or approval of court to the scheme. The application made by the company is to seek court’s approval to the company scheme of amalgamation and not merely ordering a meeting. The court may order a meeting of members too. The court must consider all aspects of the matter so as to arrive at a finding that the scheme is fair, just and reasonable and does not contravene public policy or any statutory provision. While interpreting s.394 r/w s.391, we find that the Tribunal’s power of ordering amalgamation/reconstruction is limited by two provisos of s.394: Firstly, Tribunal has to await the receipt of report from the Registrar of Companies about the manner in which affairs of the Company are conducted. Secondly, when the transferor company is proposed to be dissolved without winding up, the Tribunal shall await. 15. Stamp Duty :A scheme sanctioned by the court is an instrument liable to stamp duty. 16. Filing with ROC: The following documents shall be filed with ROC within 30 days of order: -A certified true copy of Court's Order
-Form No. 21 of Companies General Rules & Forms 17. Copy of Order to be annexed: A copy of court's order shall be annexed to every copy of the Memorandum of Association issued after the certified copy of the order has been filed with as aforesaid. 18. Allotment of shares: A Board Resolution shall be passed for the allotment of shares to the shareholders in exchange of shares held in the transferorcompany and to fix the record date for this purpose.
